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China's Guangzhou Automobile winning fans after 45% share plunge

Fri, Sep 14, 2018 - 11:20 AM

[BEIJING] An increase in sales and earnings at Guangzhou Automobile Group Co is prompting analysts to bet a 45 per cent plunge by its shares this year is overdone.

At least five analysts reiterated buy ratings on the stock this week after vehicle-market data for China showed US brands losing share, and Morgan Stanley upgraded the shares to overweight. Just one of 38 analysts recommend selling, while 33 say buy and four hold.

Guangzhou Auto, a partner for Toyota Motor Corp, Honda Motor Co and Fiat Chrysler Automobiles NV, has been ensnared in this year's rout in Chinese car stocks. Investors have brushed aside sales and profitability gains to focus on trade war with the US and China's relaxed foreign-ownership rules - a move that opens the door for the global players to set up their own ventures in the country rather than rely on local partners.

Yet the company's numbers show growth, albeit slowing. First-half car-unit sales rose 5.5 per cent after the company launched eight new and altered models, and net income increased 10 per cent to 6.9 billion yuan (S$1.4 billion). Cost control has also helped Guangzhou Auto improve its gross margin by more than half over the past two years.

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The stock jumped as much as 6.6 per cent and traded up 5.5 per cent as at 10.28am in Hong Kong. The shares had lost 45 per cent this year through Thursday.

"The stock fell out of favour this year, despite its low valuation," said Toliver Ma, an analyst at Guotai Junan International in Hong Kong. Mr Ma is among those with a buy rating on the stock, which is trading at a nearly 50 per cent discount to the average price earnings ratio of a group of 32 Asian carmakers compiled by Bloomberg Intelligence.

Mr Ma said the company's model cycle remains strong and expects its sales to benefit from demand for its Japanese partner brands. SWS Research Co analyst Alison Zhang said in a research note in June that the company's growth may accelerate from the third quarter with new models, forecasting sales to rise 13 per cent this year to 2.3 million units.

The management of Guangzhou Auto, the sixth-largest Chinese carmaker by sales, attributes the stock decline to the trade war with the US and the government's April decision to allow foreign carmakers to own more than 50 per cent of local car ventures.

"The market over-interpreted the possible impact by the removal of the stake limit," general manager Feng Xingya said in a written response to questions. "There has been no changes on the company's fundamentals."

Guangzhou Auto plans to roll out one new electric-vehicle model every half year starting from 2019 to help meet a target of alternative-energy powered vehicles to reach 10 per cent of its total by 2020, according to Mr Feng. The company also plans to start mass production of cars with L2-level autonomous-driving capability on highway next year.